The current regulatory environment enveloping the title insurance industry is clouded by constrained enforcement resources, minimal oversight of title agents and a lack of coordination among state and federal regulators, according to the U. S. Government Accountability Office’s (GAO) long-awaited report on the title insurance industry.
On April 17, the GAO, the investigative arm of Congress, released the results of its much ballyhooed probe of the title industry, launched a year ago at the request of then-House Financial Services Committee Chairman Michael Oxley.
The report, titled “Title Insurance: Actions Needed to Improve Oversight of the Title Industry and Better Protect Consumers, ” identified significant barriers to the successful regulation of the title industry, but for every weak link in the regulatory chain, the GAO offered a remedy, calling for the active participation of federal, state and local regulators.
“Given consumers’ weak position in the title insurance market, regulatory efforts to ensure reasonable prices and deter illegal marketing activities are critical, ” the report stated. “Given the variety of professionals involved in a real estate transaction, a lack of coordination among different regulators within states, and between HUD and the states, could potentially hinder enforcement efforts against compensation for consumer referrals. Because of the involvement of both federal and state regulators, including multiple regulators at the state level, effective regulatory improvements will be a challenge and will require a coordinated effort among all involved. ”
This effort is one strongly supported by all industry players, but exactly how and when the GAO’s recommendations will be implemented is a source of some debate.
Frustration exists at federal and state levels
Limited state and federal oversight of the title industry has resulted in proposals for change, the GAO found, but those changes are focused on the state level, mainly in the affiliated business arena.
“Some state regulators expressed frustration with HUD’s level of responsiveness to their requests for help with enforcement, and some industry officials said that RESPA rules regarding ABAs and referral fees need to be clarified, ” the GAO said.
However, the more limited regulation and oversight of title agents and AfBAs in less active states could provide greater opportunity for potentially illegal marketing and sales practices, the GAO said. While the GAO listed states such as Colorado, California and Minnesota as leaders in enforcement and oversight, the report concluded that states’ enforcement of anti-kickback and referral fee provisions were uneven.
That would place the onus on HUD, but HUD officials expressed concern over a lack of enforcement authority for RESPA Section 8 violations, the GAO said.
“According to HUD officials, it is difficult to deter future violations without stronger enforcement authority, such as civil money penalties, because … companies view small settlements as simply a cost of doing business, ” the GAO said.
Viewing these concerns as critical to the health of the industry, the GAO made a number of recommendations to improve oversight at each government level as well as to better coordinate the various efforts of those regulators.
Agents: Where’s the beef?
State regulators could most benefit by examining title agent costs, the GAO found. Officials in several state insurance departments last year questioned whether agents are worth their premium splits, and the GAO quickly picked up on this debate, finding that regulators do not fully assess title agents’ costs during rate reviews.
“Few regulators review the costs that title agents incur to determine whether they are in line with the prices charged, ” the report stated. “In fact, in the majority of states, agents’ costs for search and examination services are not considered part of the premium and thus, receive no review by regulators. Therefore, title agents charge separately for their search and examination services, yet they receive about the same percentage of the premium as agents in states where these costs are included in the premium. ”
Title insurers told the GAO that they generally share the same percentage of the premium with their agents, around 80 to 90 percent, regardless of whether those agents were in states where consumers pay for agents’ search and examination services within the premium rate — known as all-inclusive states — or whether they were in states where agents can charge consumers separately for those services — known as risk-rate states.
However, reliable data to determine whether consumers in risk-rate states consistently paid more than those in all-inclusive states does not exist, the GAO said, and thus recommended a “multi-step process that could involve detailed analysis of some title agents. ” While the GAO placed the onus of this auditing function on state insurance regulators, some industry experts pointed out that reporting requirements currently vary by state, making it difficult for some companies to provide the type of uniform data needed to form constructive conclusions.
In California, for example, some companies are concerned that the Department of Insurance’s proposed statistical reporting requirements will force them out of business, as they cannot now provide data from past years that was not required of them at the time.
“Some of the information the GAO wants to collect drills into personnel and hiring practices and micromanages the entire process, ” said Joe Petrelli, founder of Demotech, a ratings firm based in Columbus, Ohio. “It’s a level of detail I don’t think people have. It’s a tremendous layer of fixed overhead that no one anticipated, and it’s not like you can snap your fingers and get that type of detail. ”
Matters for Congressional consideration
As far as Congress’ role in the melee, the GAO recommended that Congress reevaluate certain aspects of RESPA.
“Revisiting RESPA to ensure that consumers receive this information as soon as possible when they are considering any type of mortgage transaction … could be beneficial, ” the GAO said.
The GAO’s recommendations to Congress were twofold. Congress could provide HUD with increased enforcement authority for Section 8 violations, such as the ability to levy civil money penalties. Congress could also make a detailed homebuyer information booklet available to consumers.
These recommendations are in line with what HUD’s RESPA office has likely been discussing since Fall 2005, when the department retreated into its chambers to mull over RESPA reform. Thus, by all accounts, the GAO’s Congressional recommendations stand a fair chance of becoming reality.
“HUD has long sought such authority, and the GAO report may be HUD’s best chance to get it, ” said Rich Andreano, partner with the Washington, D. C. , law firm Weiner Brodsky Sidman Kider PC.
But the apparent consensus between HUD and the GAO does not mean these recommendations will see the light of day, at least in the foreseeable future, said some skeptical industry leaders.
Some industry players are hedging their bets that the recommendations will be swept under the carpet as Congress contemplates changes to predatory lending and FHA reform.
Noted RESPA attorney Phil Schulman of Kirkpatrick & Lockhart Preston Gates Ellis said, “The timing of the report works in the industry’s favor, given that the focus on Capital Hill and elsewhere is on subprime lending and the avalanche of foreclosures, not title insurance reform. ”
National mortgage training expert Christopher Cruise observed that “the title insurance industry has dodged a bullet here. Asking the states to step up their enforcement activities seems reasonable, but, except in a few states with strong insurance commissioners, that simply won’t happen. I believe, in the long run that this report will have minimal effect and that title insurance rates will change little, if at all. ”
Ken Trepeta, regulatory policy representative for the National Association of Realtors (NAR), likewise said, “The RESPA civil penalties issue is intriguing, but I wonder if anyone in Congress really has the stomach to revisit RESPA. I know Sen. [Mel] Martinez is interested in RESPA, but he has spoken more along the lines of disclosure. ”
The writing on the wall
Although some are skeptical that the report will matter much in this era of increased scrutiny on predatory lending and mortgage issues, others believe it is a fallacy to say that the problems of the title and settlement services industries are that far removed from the problems in the mortgage industry.
Indeed, Rep. Spencer Bachus, R-Ala. , ranking member of the House Financial Services Committee, has commented, “The GAO’s findings are significant, and I look forward to reviewing those findings thoroughly. ”
Some respected sources have indicated to The Legal Description that Congress has been waiting for the results of the GAO report in order to determine if there were issues that needed to be addressed before putting RESPA and title industry reform on the front-burner.
Other industry leaders willing to speak on the record agreed that this scenario is not as farfetched as some skeptics believe.
“Congress obviously is still reviewing this and will be, I presume, taking that under consideration along with any other appropriate legislation, ” said Sue Johnson, executive director of the Real Estate Services Providers Council Inc. (RESPRO). “I would be surprised if Congress did not touch base with HUD to check on the status of their RESPA rule and consult with them. A lot of this has to simply play out. ”
Andreano was perhaps most confident in the prediction that Congress will put all of the pieces of the puzzle together to bolster its ongoing homeownership initiatives.
“I think it’s safe to say that the GAO will not be on the title industry’s Christmas list this year, ” Andreano said. “While the report focuses on, and is critical of, the title industry, all settlement service providers need to focus on Congressional reaction. Clearly, title industry revenues are now under a microscope and the industry needs to be prepared to address scrutiny from regulators and lawmakers.
Amy Swinderman is the editor of The Legal Description , a trade publication specializing in focused analysis of legislative, regulatory and legal issues facing the title insurance and real estate settlement services industries. The Legal Description is a publication of October Research Corp , the nation’s premier provider of real estate industry news and analysis.